UK Government Reaches Out To Bitcoin Community About Regulation

The United Kingdom has been one of the most pro active and friendly jurisdictions for Bitcoin, the UK government recently removed the 20% Value Added Tax (VAT) on Bitcoin trades. In a speech at the launch of Innovate Finance, the new trade body for Financial Technology (Fin Tech), Chancellor of the Exchequer George Osborne explains, “the technologies being developed today will revolutionise the way we bank, the way we invest, the way companies raise money. It will lead to new products, new services, new lenders.”

In an article on gov.uk Andrea Leadsom MP, Economic Secretary to the Treasury, gives 5 reasons they are making a call for information about digital currencies:

1. We want to promote innovation and competition in the banking sector
2. New types of digital currency are being developed and digital currency businesses are setting up in the UK
3. We want to hear about the benefits of digital currencies for the people that use them and the wider economy
4. As well as the benefits, we also want to hear about the risks that might come with using digital currencies
5. We also want to hear your views on whether regulation of digital currencies is required

This is part of a bigger program announced in August by Osborne. The program is investigating crypto-currencies in various ways with a view to creating, “the best environment in which this financial innovation can flourish."

"I want the UK to lead the world in developing Fin Tech.”- Osborne

The beginning of the document calling for information, clarifies a few things about the Treasuries focus in digital currencies. The interest in crypto-currencies comes from the currencies’ payment system, not the speculative investment they represent to some. Another important distinction they made was between digital and virtual currencies. They explain the UK government defines virtual currencies as “issued and usually controlled by their developers, and used and accepted among the members of a specific virtual community.” Because of that, they considered virtual currencies outside the scope of their call for information.

“We’re considering the potential benefits of digital currencies to customers and the technology that underpins them, and whether we should take action to support innovation in this area. We’re also looking at the potential risks, and assessing whether action is required to address any concerns.”

The document goes on to give a more detailed explanation of the call for information. They add to the clearly stated interest in innovation, explaining this is a strategic move for Britain within “ongoing discussions in Europe” centered on crypto currency. “The information gained through this Call for Information will be used to ensure the UK government’s own position on digital currencies is properly informed and in the best interests of UK consumers and businesses.”

The UK government said some of the clear benefits of digital currencies are low transaction fees, faster processing times, cheap international transactions and user convenience. However, they go on to say digital currencies may have limited benefits, describing “the fluctuating price” as a reason that they are “not a stable store of value”, going on to add a “very limited number of merchants” accept digital currencies, and “There is also very limited buyer protection” referencing the lack of transaction reversal.

Consumer protection is a big concern for the Treasury. Potential loss of funds and the inability to retrieve those funds is one of the main risks they consider digital currency users face, wallet providers and Exchanges are also a cause for concern. “If a digital currency user’s digital wallet was hacked, for instance, this would result in a loss of funds for the user. Funds could also be lost if these wallet providers or the exchanges through which digital currencies are converted into fiat currencies fail. Users would be unable to recover these funds, as there are currently no protections in place.”

In the crime section, they noted the borderless nature of digital currencies and their degree of anonymity concluding, “the key crime risks are the purchase of illegal goods and services; fraud; anonymous extortion; money laundering; and terrorist financing.” They go on to counter “discussions have also highlighted that there may also be reasons why the crime risks of digital currencies are limited”, clarifying that there is in fact “limited anonymity of digital currencies” and “the ‘distributed ledger’ technology employed by decentralised digital currencies records all transactions.”

As a result, they are focusing on an international approach to fighting digital currency crime. They see the pseudo-anonymity as potentially enabling criminals but at the same time see how the blockchain, which records all transactions, as something that can limit crime through transparency.

They make a direct reference to international partners stating “The European Commission is currently considering regulating digital currencies via the Anti-Money Laundering Directive, and the USA’s Financial Crimes Enforcement Network (FinCEN) has already applied rules relating to anti-money laundering to administrators and exchangers of digital currencies.”

One question asked “What has been the impact of FinCEN’s decision in the USA on digital currencies?.” The ruling being discussed is FinCEN’s new guidance which labeled US bitcoin exchanges and payment processors as money transmitters. The ruling was protested by some because they see the compliance and fees, required for registration, as too expensive for bitcoin startups.

The last section dealt with the price of digital currencies. The main concerns the UK Treasury have are price volatility, low liquidity, the possibility of higher transaction costs, and the limited money supply of digital currencies like Bitcoin. They did add that these concerns, combined with a decentralized digital currency with mass adoption, could cause problems for monetary policy and fiat currencies.

“Digital currencies, as an alternative to fiat currencies issued by central authorities, could conceivably pose financial stability risks and weaken monetary policy making”

See the original document, with the full set of questions here. You can send them your answers by emailing: [email protected]

Sophie is an artist whose secret passion is finance, economics, and technology. Shh! Don’t tell the artists she works with, they hate that kind of stuff. She loves keeping up with the ever expanding and evolving world of crypto-currency. When she isn’t painting, she can be found trying to understand the complex inner workings of markets. Another complex system she is fascinated by, are ecosystems. She often observes them on her daily hikes through nature.